finance, business idea and market considerations Flashcards
What does finance refer to
the funds required to carry out daily operations of a business
what is dept financing
money obtained through loans
short term- less than a year
money for day-day
bank overdraft
medium term- between 1-5 years
money for equipment, expansion and new products
term loans
long term- over 5 years
money for buildings new equipment and land
mortgage
what is equity financing
also equity capital
funds by owners to start then expand the business
family/friends
self funding
crowd funding
shares
private investors
what 3 things effect the cost of finance?
Type of finance
e.g dept financing requires external sources and therefore is more costly as it requires interest
(Debt finance or equity finance)
Term of Finance
e.g equity finance can be measured by terms of liability
Source of Finance
e.g family or friends may want a share of the business or may just invest and want no return
2 benefits and 2 disadvantages of equity finance
adv
don’t need to pay interest and
does not have to be repaid
disadv
may not generate as high profits as expected
may have to give up a portion of ownership
2 benefits and 2 disadvantages of debt finance
adv
no selling of ownership
Disadvantage
interest payments
has to be repaid
what is an overdraft adv and disadv
when the bank allows a business to overdraw their account to an agreed limit for an agreed amount of time (short term- within a year)
adv
assist in daily operations
convenient and relatively cheap for of short term
disadvantage
higher interest rates and higher fees
what is a mortgage
a loan secured by the property of borrower (business)
adv
source of funds to purchase property
dis
high interest rates
establishment costs, ongoing charges
what are the 3 business establishment options
starting a business from scratch
70% start from scratch and 50% fail in first year
purchase an already existing business
why is the business for sale? if its been struggling probably not a good purchase
also purchasing staff, existing customer base, reputation and location
purchase a franchise
franchise agreement
% goes to franchisor
what should you do once you have a business idea
identify business opportunities
-find a gap in the market
-analyse and review the market
-identify a demand
consider the competition
- to be more competitive
lower costs and prices
differentiate products
start from scratch adv and disadvantages
purchase already existing business adv and disadvantages
purchase franchise adv and disadvantages
scratch
+
freedom of choice
determine pace and growth
no goodwill to pay
-
high risk and uncertainty
start up period slow
existing
+
stock already required
already have customer base
-
success may have been result of previous owner personality and contacts
may be hidden problems
franchise
+
franchisor pays for training and management backup
immediate benefit from franchisors goodwill
-
share burdens of franchisors potential mistakes
no freedom of choice
what are the 3 market considerations
goods and service
what is being sold? good, service? who is your market? market analysis
determined by gaps in the market
price
cost based- total cost of producing and purchasing- markup for profit
competition based- based on competitors prices
market based- setting price based off what it should be (levels of supply and demand)
location
proximity
local government zoning
